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Do I Have to Pay Taxes on My Car Accident Settlement

Written by Jared Staver

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Jared Staver is a Personal Injury Lawyer based in Chicago, Illinois and has been practicing law for over 20 years.

Jared Staver

CATEGORY: Auto Accidents, Insurance, Personal Injury


After suffering injuries in a car accident, you may have to endure months of fighting for compensation from an insurer or the party responsible for the collision. Occasionally, insurance companies quickly admit their policyholder’s fault and their liability for your damages. Unfortunately, it is more likely that you will need a personal injury attorney to fight on your behalf, prove the other driver’s responsibility, and negotiate a fair settlement. However your car accident settlement is obtained, you will probably feel a flood of relief when you finally receive the check to cover your medical expenses and help you get caught up on your bills. However, there’s one more element you may need to consider before using all of the money you recover – taxes.

For information on whether you have to pay taxes on your car accident settlement, contact the lawyers of Staver Accident Injury Lawyers, P.C. today at (312) 236-2900.

Compensation for Your Personal Injuries

In most situations, your settlement funds for physical injuries resulting from a car accident are entirely tax exempt. The settlement you receive is intended to directly compensate your losses, so it should have no positive or negative effect on your income. Thus, you are not required to claim it for tax purposes.

However, if you take an itemized deduction for medical expenses related to your injuries, you may have to report your personal injury compensation as well. If your medical expenses are used to deduct taxable income, your settlement would offset that deduction up to the amount of your medical expenses. If you deduct your medical expenses in one year and receive a settlement in the next year, you may have to claim the monetary recovery as income in the year it is received. You would only have to claim an amount up to that which you deducted in the previous year.

If you are concerned about how to claim your car accident settlement on your taxes, talk to an experienced attorney or accountant to determine what tax benefit you received and how much of your settlement you must include on your taxes.

Clarifying Damages for Emotional Distress

If you were awarded damages for pain and suffering, emotional distress, or mental anguish related to the physical injuries from the car accident, the amount of recovery is non-taxable. However, if you were paid for your mental and emotional suffering that is unrelated to physical injuries, then that amount may be subjected to taxes. Only a tax specialist or accountant can evaluate your specific situation regarding your taxes.

Recovering for Your Vehicle and Other Property Damage

While most car accident settlements are predominately related to your physical injuries, a portion may be to reimburse you for damage to your car or other property. This portion of your settlement is generally not taxable. It is intended to directly compensate you for losses incurred, so it has no positive or negative impact on your income and does not have to be taxed.

The Portion of Your Settlement Dedicated to Lost Wages

If you were unable work for a period of time due to your injuries, your attorney likely negotiated lost income as part of your settlement. In general, the amount you receive to make up for what you would have earned at work is taxable. This is because your wages would have been taxed as well. You do not have to add your entire settlement as part of your income, only the amount attributable to lost wages. Speak with your attorney to ensure you understand how your settlement breaks down so you provide the IRS with an accurate amount and do not pay more taxes than necessary.

What About Punitive Damages?

You may have obtained punitive damages in addition to compensation for your medical expenses, lost wages, and pain and suffering. These damages are not meant to reimburse your or compensate you for any harm done to you. They are purely meant to punish the person responsible for your car accident. These damages are taxable, and you must include them as “Other Income” on your tax form. Be sure you know how much of our settlement was attributed to punitive damages.

If You Earn Interest on Your Settlement

Depending on how you bank and maintain your settlement, you may earn interest on the money. All interest earned on your compensation is taxable. There are specific sections of tax forms that request information regarding interest income.

Contact our Lawyers Toda

If you received compensation for injuries arising from a collision, you should immediately learn the tax consequences. Your settlement may be entirely tax exempt, or you could owe your state or the IRS money based on a portion of your settlement as income. If you can expect a tax liability, you will want to maintain some of your compensation to cover this expense at the end of the year.

Contact the experienced attorneys of Staver Accident Injury Lawyers, P.C. at (312) 236-2900 to learn more about the potential tax consequences of a car accident settlement.

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(312) 236-2900
(312) 236-2900
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